IBM focuses on software and services to meet targets

IBM has continued to outperform its technology peers during the downturn, relying on wider services and software margins in the first quarter to make up for a continuing slump in hardware sales, its results showed yesterday.
##CONTINUE##
Although net income dipped 1 per cent to $2.3bn from a year earlier on an 11 per cent drop in revenue, IBM's share repurchases from what is now a cash hoard of $12.3bn pushed earnings per share up to $1.70, from $1.64. The stock buy-back reduced shares outstanding by 4 per cent.

Mark Loughridge, chief financial officer, said that he was "if anything, more confident" than three months earlier that IBM would meet the target it set then of $9.20 per share full-year earnings.

Asked about IBM's loss of its quarry, Sun Microsystems, to its key rival, Oracle, in the acquisition announced yesterday, Mr Loughridge said he had no regrets.

"Oracle and Sun have been partnering for two decades, and what's the result?" he said. "We've picked up 14 percentage points of [market] share [in high-end servers] since 2000, and we have 32 points now."

IBM had negotiated down to the fine details with Sun before talks collapsed, but sources close to IBM pointed to problems that came up during Big Blue's extensive inquiry, including employee and customer contract terms.

"We run a very disciplined process," Mr Loughridge said. "When we run a disciplined process, we get good results."

Mr Loughridge said that IBM would cut a further $1bn of expenses out of its system during the year, on top of the $2bn in savings from restructuring last year and in the first quarter.

Total gross margin expanded to 43.4 per cent in the quarter, from 41.5 per cent a year earlier. That was largely due to an 84.2 per cent software margin, where revenue slipped less than in the computer business.

IBM, headed by Sam Palmisano, predicted that revenue would go up in its services business in the second half of the year. Service contract signings increased 27 per cent in the most recent quarter after adjusting for currency fluctuations.

IBM said its latest results benefited from its continuing "transformation" to a services company. While in mature markets a lot of the services contracts it has been securing concern saving money, the developing world's deals include infrastructure build-outs.

Those markets are supplying a growing percentage of IBM's total revenue and profit.

Revenue from growth markets reached 17 per cent in the first quarter.

IBM and Oracle have long been rivals in the sale of database software, while IBM and Sun compete on servers and data storage.

The combination with Sun will make Oracle more of a full-slate contender, just as Cisco is expanding its own mission with the introduction of servers, on top of its core networking gear.

-----------------------------
BY Joseph Menn in San Francisco
Source：The Financial Times

© Copyright The Financial Times Ltd 2009.